H-P seen suffering little from board-spying flap

Leak probe fallout's 'really more of a sideshow,' says analyst

SAN FRANCISCO (MarketWatch) -- Hewlett-Packard's decision to spy on its board members to stop them from leaking information to the press is an embarrassment but is unlikely to have any long-term negative impact on the company or its board members, industry analysts and officials said Thursday.

The brouhaha centers on board Chairman Patricia Dunn and the hiring of outside investigators to probe the source of leaks to the media about details of company board meetings. The investigators farmed out some of the work to other contractors, who in turn used a method called "pretexting" -- posing as people or organizations -- to get information that pointed to H-P board member George Keyworth as the source of the leaks.

Keyworth was asked to resign but refused, and another H-P board member, Thomas Perkins, quit in protest. Palo Alto, Calif.-based H-P
HPQ, -0.33%
has said that it won't renominate Keyworth at its annual meeting next spring. See related story.

While an investigation by California state Attorney General Bill Lockyer guarantees that what might have been a simple boardroom dispute between big egos is now a case that will continue to play out in the public domain, the view from the industry is that Dunn will likely remain as H-P chairman and that there will be little effect on H-P's operations or on Chief Executive Mark Hurd.

"Yes, it's important to the stability of the board," said Daniel Renouard, senior research analyst with Robert W. Baird. "But the [business] course has been set by Hurd, and that is more important for its impact on H-P. This is really more of a sideshow than a real issue."

Dunn in the spotlight

At the middle of the storm is Dunn, H-P's nonemployee chairwoman, and whether she knew about the pretexting information-gathering methods as they were happening. Pretexting is illegal under California state law.

Tom Dressler, a spokesman for Lockyer, said that the attorney general's office had no comment about whether Dunn or Hurd have been questioned directly about the case, or if either them, or anyone else, is a target of the AG's investigation. Dressler added that the attorney general was focusing on how current state law applies to H-P's actions in this case.

"We are looking at state statutes on ID theft and unauthorized access to corporate and personal data," he said. "We are not focusing on anybody specifically at this time."

H-P didn't immediately return calls for comment, but in a Securities and Exchange Commission filing on Wednesday, the company said that it was informed of the pretexting methods after the fact, and that at the time of the investigations H-P's outside counsel said that pretexting "was not generally unlawful (except with respect to financial institutions), but such counsel could not confirm that the techniques employed by the outside consulting firm and the party retained by that firm complied in all respect with applicable law."

Crawford DelPrette, senior vice president of research at IDC, said that unless it comes out that Dunn had firsthand knowledge, or gave approval of any illegal activities before or as they were happening, it's highly unlikely the H-P board will seek her removal.

"I think the board will support Patty because she has clearly emerged as a strong board chairman," DelPrette said. "History will probably look at what she did [to stop the leaks] as important for the board's authority."

Still, even though H-P hasn't been charged with any wrongdoing, the ethical issues surrounding the gathering of information about board members remain, and cast at least some shadow upon a company long known for its straightforward business behavior.

The hiring of Hurd, formerly chief executive of NCR Corp.
NCR, -0.25%
was seen by many in the tech industry as a step toward bringing steadiness back to the company, which was shaken by years of scrutiny with former Chief Executive Carly Fiorina.

Momin Khan, an analyst with Technology Business Research, said that Hurd's efforts since becoming chief in March 2005 have gone a long way toward restoring investor confidence and the H-P corporate culture. Khan added that in its own way, Dunn's methods of clamping down on corporate leaks actually fits in with the company's turnaround.

"They are clearing ship and trying to get rid of corruption and unethical business practices," he said. "There are issues regarding privacy, but H-P is now about a culture of business ethics and accountability."

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